Getting approved for a home loan these days can be challenging. As a borrower, if you have bad credit or are looking for a non-owner occupied loan, your situation is likely dire. With the credit crunch brutalizing the financial industry, banks have been forced to tighten up their lending standards. That means that if borrowers don't have pristine credit, and ample income and reserves, the chances of them getting approved for a loan is minimal. With credit standards so tight, there are a huge number of potential borrowers that are simply out of luck. If you happen to be an investor looking to take advantage of today's incredible real estate investment opportunities, the situation might seem hopeless - but it doesn't have to be.
Hard money lenders have become a very popular option for investors in today's market. The simple reason for this is that hard money lenders are filling the gaping holes not being covered by traditional lenders. Hard money lenders are in business specifically because they take on loans that banks won't. These hard money lenders tend to focus more on property fundamentals and equity position - rather than a borrower's credit history. Hard money loans will certainly cost more than traditional loans, but for investors looking to cash in on a great investment opportunity, the extra loan costs might be more than worth it.
Traditional or Hard Money Loan
Hard money loans might be easier to get than traditional loans, but that doesn't mean that investors should overlook traditional loans entirely. As a borrower, if you are able to get a traditional loan, you should. Rates are so ridiculously low right now on traditional loans, those investors who are able to get long term fixed traditional loans are starting out with a huge advantage. Hard money loans will not only come with a much higher interest rate, but also more points up front. The total APR on hard money loans will be considerably higher.
Typically the main reason an investor would choose a hard money loan over a traditional loan - assuming they could qualify for a traditional loan - is timing. If an investor needs access to funds in a very short amount of time, getting a hard money loan might be their only option. Banks tend to have a very defined process when it comes to funding a loan, and getting them to deviate from that process is nearly impossible. Because of this, it typically takes at least 30 days to fund a traditional loans. If an investor needs the funds in five days in order to close a deal - for example - then a hard money loan is probably the only option.
Qualifying for a Hard Money Loan
Qualifying for hard money loans tends to be more straight forward than traditional loans. When looking at hard money loans, remember that hard money lenders are themselves investors. When hard money lenders evaluate loan opportunities they are looking to maximize returns and minimize risk - just like every investor. While hard money lenders would love their borrowers to have great credit, it isn't the number one factor they use to evaluate lending opportunities. The top factors hard money lenders tend to look at are property fundamentals and equity. They want to know that in the event the borrower defaults, and they have to foreclose on the property, that they will be able to recover their investment. They will look at things like the rental marketability of a property, cash flow, and so on. This is great for investors, because if you find a great investment opportunity, it is likely something that hard money lenders are going to be willing to fund.
Along with property fundamentals, hard money lenders are also looking for equity. Typically hard money lenders aren't going to lend more than 70% of a property's LTV. For investors, though, there are hard money lenders that will lend based on repaired or remodeled value. Again, hard money lenders can be a lot more flexible than traditional lenders. As long as an investment makes sense to a hard money lenders, they may fund the deal. They certainly have some guidelines they like to use and keep to, however, at the end of the day they can be flexible if they see an investment opportunity that makes sense.
How to find Hard Money Lenders
Searching for hard money lenders is easy. To start, try a simple online search, which should generate a large number of lenders. Knowing which one is right for you, though, can be a little more challenging. Every hard money lender is going to have their "bread and butter" deals. Just like with venture capital firms, had money lenders prefer to stick to the type of investment they know. You might have to talk to a number of lenders before you find one that is interested in the type of investment you are pursuing, but keep at it. If the investment opportunity is good enough, you should be able to find a lender that will work with you.
Yanni Raz is a financial writer for hardmoneyloans.org.